Insurance coverage for
construction defects or faulty workmanship has long been a contentious issue
between insurers and policyholders. Numerous jurisdictions rejected coverage
for such claims in the past, but now, disputes over construction defect claims
are increasingly resolved in favor of coverage. In this Analysis, Michael T.
Callahan and Thaddeus J. Schurter discuss the expansion of commercial general
liability coverage for construction defect claims. They write:

[W]hether defective work is covered by CGL [Commercial
General Liability] insurance is often decided by how the word
"accident" is understood. Does the intent to commit an act, even
where that act results in unintended consequences, preclude coverage because an
intentional act is not an accidental one? Courts have reached different
conclusions, sometimes even when applying the same laws. In one such case, the
U.S. District Court for the Southern District of Illinois recently concluded in
Western World Insurance Co. v. Penn-Star Insurance Co. [2009
U.S. Dist. LEXIS 47921 (S.D. Ill. June 8, 2009)] that unintentional
damage caused to an adjoining structure during demolition constituted an
occurrence. In Western, the City of East St. Louis contracted with McCoy
Construction to demolish a building at 320 Collinsville Road. During demolition
part of a wall that was common to both 320 Collinsville Road and 318
Collinsville Road was damaged. Upon realizing its mistake, the contractor
stopped immediately, but the damage was done. Penn Star Insurance, which
insured the damaged building, filed a subrogation suit against the city and the
contractor for negligence and inverse condemnation. Western World Insurance,
the contractor's insurer, refused to defend or indemnify in the suit. After the
parties reached a settlement, the contractor's insurer filed a declaratory
judgment action.

The
contractor's insurer asserted what had become the default insurer position in
nearly all construction defect cases, that the damage was not covered because
it was not an occurrence. It maintained that because the contractor intended to
demolish the common wall, any damage it caused was not accidental. The city
contended that while the demolition was intentional, the resulting harm to the
neighboring building was not, and thus its actions were covered as an accident.
In addressing what types of conduct trigger CGL coverage, the court explained
that the important question was not whether the acts which resulted in damage
were intentional, but rather whether the injury was expected or intended by the
insured. Accordingly, intentional acts that produced unintended and unforeseen
consequences could qualify as accidents. Because the contractor intended to
demolish the common wall but did not intend to damage the second building, the
property damage was an accident and an occurrence under the policy.

By
contrast the U.S. District Court for the Northern District of Illinois reached
an opposite conclusion on a similar case some three years earlier. In Century
Surety Co. v. Demolition & Development Ltd. [2006
U.S. Dist. LEXIS 2128 (N.D. Ill. Jan. 18, 2006)], a contractor's
demolition of the wrong building, based on erroneous information from a city
employee, was not considered an occurrence. In Century, the City of Chicago
hired a demolition contractor for an emergency tear down of a building located
at 4710-20 South Indiana Avenue. After arriving on site, the contractor's
president was uncertain which buildings to demolish, since three buildings with
no addresses posted on them were near the demolition location. An employee at
the city's buildings department verified that the three buildings were to be
demolished. The contractor began its demolition but stopped after the surprised
owner of one of the buildings indicated that his building, 4708 South Indiana,
was not supposed to be demolished. A city inspector confirmed that the building
was not subject to the court order. The contractor's insurer denied coverage
and filed a declaratory judgment action.

The
contractor's insurer conceded that the property was damaged but argued that
because the demolition was intentional, any resulting damage was not
accidental, despite the error in identification. The insurer further maintained
that as an expected result of demolition, the damage could not be classified as
unforeseen. The insurer added that even if an occurrence took place, several
exclusions exempted coverage. The contractor contended that its demolition of
the wrong building was accidental. The court disagreed.